Policymakers should stop trying to promote business niches rather than the
biggest sectors and recognise that multinationals drive growth, according to
a new report from McKinsey.

Productivity within each sector is what matters rather than sector mix, but the focus is often on "innovative niches" such as solar energy or semiconductors that are too small to have a broad impact, said the consultancy firm.

Meanwhile, the service sectors behind much job growth, such as the retail trade, tend to be overlooked, the report warned, blaming the UK's dominant service sector for much of our productivity gap with the US and Germany.

In addition, multinationals may account for less than 2pc of UK businesses, but they expanded around eight times faster than smaller firms in the years from 2000 to 2008, the report said.

Ministers should work with top multinational firms to carry out a 10-year plan to make the UK the most attractive place to operate in Europe, according to McKinsey.

Plans to cut the headline rate of corporation tax from 28pc to 24pc are a step towards that goal, the report said, but the UK could go further. It could, for example, pledge to always be among the fifth of key economies with the lowest corporation tax.

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The report also argued the case for giving cities more autonomy to experiment with ways to drive growth.

The proposals were among seven strategies outlined with a view to making the economy more productive, broad-based and resilient.

Kevin Sneader, McKinsey's UK managing partner, said: "Contrary to the prevailing economic gloom, we judge the prospects for long-term economic growth to be strong – provided that bold action is taken to remove key barriers. The stakes are too high to fail."

Looking more to the short-term, British businesses have lowered their expectations as they become increasingly worried about customer demand, the latest ICAEW/Grant Thornton quarterly business confidence monitor showed.

The index fell sharply from July to October from a reading of 21.5 to 11.9, as the number of businesses feeling "less confident" about the coming year rose from 19pc in the third quarter to 24pc.

Most - 57pc - said they are still running below capacity and expectations for profit growth in the next year have been trimmed. The results suggested the UK's economic expansion in 2011 will be slower than official forecasts, researchers said.